The Causes of Subprime Mortgage Financial Crisis
The Causes of Subprime Mortgage Financial Crisis
By Jessica Tian
Abstract
The U.S. subprime mortgage crisis was a set of events that led to the 2008 financial crisis, characterized by a rise in subprime mortgage defaults and foreclosures. This paper seeks to explain the causes of the U.S. subprime mortgage crisis and how this has led to a generalized credit crisis in other financial sectors that ultimately affects the real economy. In recent decades, financial industry has developed quickly and various financial innovation techniques have been abused widely, which is the main cause of this international financial crisis. In addition, deregulation, loose monetary policies of the Federal Reserve, shadow banking system also play dominant roles in this crisis. From the bankruptcy of Lehman Brothers, AIG, Washington Mutual Bank, government takeover a series of financial institutions, the world's major economies continued to fall. The direct consequence of this financial crisis will inevitably lead to the global economic downturn and even recession.
Introduction
This paper has two sections. Section I gives an overview and background of the subprime mortgage crisis, the recent financial instruments and innovations, and how the crisis led to a generalized credit crisis in the financial industry. Section II discusses the causes of the crisis, including deregulations, loose monetary policies and so on.
1. Background and Financial Derivatives 1.1 Housing industry and subprime mortgages
Some years before, the U.S. housing mortgage party was prosperous, investors and mortgage bankers made millions, even billions from this party, which may due to the low interest rates. In the wake of the dot.com bust and 9.11 disaster, the U.S. Federal Reserve Chairman Alan Greenspan lowered interest rates to only 1% to keep the economy strong, which is a low return on investment that led investors to seek for better investment opportunities. So the investors turned into the
By Jessica Tian
Abstract
The U.S. subprime mortgage crisis was a set of events that led to the 2008 financial crisis, characterized by a rise in subprime mortgage defaults and foreclosures. This paper seeks to explain the causes of the U.S. subprime mortgage crisis and how this has led to a generalized credit crisis in other financial sectors that ultimately affects the real economy. In recent decades, financial industry has developed quickly and various financial innovation techniques have been abused widely, which is the main cause of this international financial crisis. In addition, deregulation, loose monetary policies of the Federal Reserve, shadow banking system also play dominant roles in this crisis. From the bankruptcy of Lehman Brothers, AIG, Washington Mutual Bank, government takeover a series of financial institutions, the world's major economies continued to fall. The direct consequence of this financial crisis will inevitably lead to the global economic downturn and even recession.
Introduction
This paper has two sections. Section I gives an overview and background of the subprime mortgage crisis, the recent financial instruments and innovations, and how the crisis led to a generalized credit crisis in the financial industry. Section II discusses the causes of the crisis, including deregulations, loose monetary policies and so on.
1. Background and Financial Derivatives 1.1 Housing industry and subprime mortgages
Some years before, the U.S. housing mortgage party was prosperous, investors and mortgage bankers made millions, even billions from this party, which may due to the low interest rates. In the wake of the dot.com bust and 9.11 disaster, the U.S. Federal Reserve Chairman Alan Greenspan lowered interest rates to only 1% to keep the economy strong, which is a low return on investment that led investors to seek for better investment opportunities. So the investors turned into the
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